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Europe

Lufthansa CEO Sees Opportunities in Blended Travel Coming to Europe

Edward Russell
October 27th, 2022 at 2:01 PM EDT

A traveler checks in at a Lufthansa counter

When Lufthansa Group CEO Carsten Spohr first joined the airline in 1994 the old paradigm of travel stood true. The busiest day of the week was Friday when road — or weekend — warriors paid top dollar, or deutsche mark, to get to their weekend destinations.

“Now it’s Thursday and Saturday, [and] that says a lot,” Spohr said of the strongest day of the week now during the group’s third-quarter earnings call Thursday. That, he said, is the result of a shift in travel pattern towards more blended trips, or ones that involve both business and leisure aspects.

Blended travel prompting significant changes in the businesses of U.S. airlines. American Airlines Chief Commercial Officer Vasu Raja said in September that these trips now make up nearly half of overall revenues; double what they were before the pandemic. That has prompted network changes where American is concentrating capacity in domestic and shorthaul international markets, rather than on longhaul flying. And United Airlines CEO Scott Kirby said earlier in October that travel patterns were amidst a “structural change” to the benefit of airline financials and operations.

“We will see that in Europe as well, probably a little later, probably a little less,” Spohr said on blended travel trends. “Indeed, there is such a mix and that offers new opportunities for us.”

One big part of that will be the continued strength of the premium leisure travel that emerged during the pandemic, Spohr said. That gives him confidence in Lufthansa’s decision to embark on a 2.5 billion ($2.5 billion) upgrade to its onboard products that includes more premium seats.

The rise of premium leisure travel was named as a 2022 travel megatrend by Skift.

Blended or not, the demand for travel remains robust in Europe. The Lufthansa Group forecasts a 22-23 percent increase in yields in the fourth quarter compared to 2019, Chief Financial Officer Remco Steenbergen said. That follows a nearly 23 percent increase in the September quarter.

“We don’t see any end of the high yields looking through [the fourth quarter],” Spohr said. “And, to take that into [the first quarter], why would it end? There is some optimism there.”

Spohr’s comments come despite a gloomy economic outlook. The International Monetary Fund lowered its growth forecast for the eurozone earlier in October to just 3.1 percent this year, and 0.5 percent in 2023 — an 0.8 and 2 point reduction, respectively, from its January outlook. Germany, along with Italy, is forecast to slip into a recession next year. The organization highlighted a “cost-of-living crisis” that includes both high inflation and energy prices.

But Lufthansa is not alone in its demand outlook, including from airlines in the U.S. and Latin America, despite the economic storm clouds. Norwegian Air, the only other European airline to report third quarter earnings to date, sees strong demand through the December holidays, CEO Geir Karlsen said Wednesday, though he warned that visibility into the first quarter was limited.

Adding to Lufthansa’s financial optimism is the expected capacity discipline that is being forced on airlines as the industry recovers. Global supply chain bottlenecks have slowed the delivery of new aircraft — including of Lufthansa’s own new Boeing 787s — staffing remains a limit on growth, and high fuel costs and other fees act as barriers to entry to new competitors, Spohr said. This will keep what airlines can fly next year in check, even if there is travel demand for more flights.

“Global aviation will not return to the overcapacities witnessed in the pre-pandemic times anywhere soon,” he said. Though Spohr added that the discipline was “forced” on the industry, rather than the result of more rational management and planning.

But even disciplined growth involves some big moves, including bringing back Lufthansa’s Airbus A380s. Three aircraft will resume flying at its Munich hub next June, with the number likely to increase in response to demand, Spohr said. “You should book now because our passengers love it and want to fly it,” he added jokingly to investors.

Costs remain a concern. Lufthansa expects fuel costs to remain elevated through next year, Steenbergen said. As such, the group continues to work on other areas of cost savings, including its €3.5 billion in structural cost cuts by 2024. Inflation, however, has shifted some of those savings to different parts of Lufthansa’s business than originally planned, including its sales and maintenance functions. Labor costs are also a question mark; the group has reached 10 new accords, including with its pilots at Austrian Airlines, Lufthansa, and Swiss Air, but others, including with Eurowings pilots, remain outstanding.

Spohr was frank on negotiations with pilots at Eurowings, who have held three one-day strikes so far in October: “Additional costs result in less routes being profitable, result in less aircraft being needed unless you can lower the cost somehow else. That’s why five aircraft have been taken out.” He added that cost increases could “endanger the business model” of the group’s budget airline.

The Lufthansa Group expects fourth quarter unit costs excluding fuel and foreign exchange to increase at a rate lower than the 9.5 percent year-over-three-years rise in the September quarter.

In the third quarter, the group reported an operating profit of €1.1 billion, and a net profit of €809 million. Revenues came in at €10.1 billion, a 93 percent year-over-year increase and down just 1 percent from 2019. Passenger traffic and capacity were both down roughly 22 percent year-over-three-years.

Austrian was the group’s strongest margin performer in the third quarter. It posted a 16 percent operating margin and €110 million operating profit during the period. Steenbergen, who described the quarterly profit as a “record” for the airline, said the success was the result of yield growth outpacing costs at Austrian, and its “extremely good” brand and service position in the market compared to low-cost competition, particularly in Vienna.

Looking ahead, the Lufthansa Group plans to fly roughly roughly 80 percent of its 2019 capacity in the fourth quarter, and maintains its guidance of roughly 75 percent for the full year. Executives reiterated their September guidance of a full year operating profit of more than €1 billion; more than double the expectation in July. The airline did not provide detailed financial guidance for the fourth quarter.

Edward Russell
October 27th, 2022 at 2:01 PM EDT

Tags: Europe

Photo credit: A traveler checks in at a Lufthansa counter Lufthansa

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